David Moenning's Daily State of the Markets: 6/19

A Big Signal Turns Green

Although the bears will likely grumble about the lack of momentum during yesterday’s session, the bulls were pleased to see the three-day slide in stock prices come to an end. But cutting to the chase, if there was anything that should be taken away from Thursday’s action it was that the market remains dependent on the economic data.

A month or so ago, the concept of things looking less bad was considered a good thing. However, nowadays, “sucking less” just doesn’t cut it as stock prices have begun to discount the eventual recover in the economy. No, these days the bulls need to see signs of actual improvement in order to be able to keep the ball moving up the field. And the bottom line is we saw some of this yesterday.

While even the bulls will admit that yesterday’s action was less than robust, the underlying cause of the rally wasn’t half bad. The big news, which was all but ignored by the talking heads, was the second straight monthly gain in the Conference Board’s index of leading economic indicators (LEI). The index surged 1.2% which was the most since March 2004. The gain in May pushed the index through its 6-month moving average, which represents a “buy signal” for the economy.

Okay, we can actually understand why a little-followed economic indicator moving through a moving average wouldn’t make the news headlines. However, the reason we bring it up is this indicator has a near perfect track record in calling the end of recessions. Such a change in the trend of the LEI has consistently identified the end of downturns within a two month range since 1948.

Although it might be premature to break into a chorus of “happy days are here again,” it was also encouraging to see the Philly Fed General Business Activity Index soar by 20.4 points in June to its highest reading since September. And since the estimates had been for a much smaller uptick, this was the biggest “miss” by economists on this particular index since April 2005. Finally, it is worth noting that the Philly Fed Index is actually up 15.5 points from its year ago level, which is the biggest year-over-year gain in nearly 5 years.

While it may be a bit of a stretch to see our next piece of data from the glass-is-half-full side, it was also modestly encouraging to see continuing jobless claims fall by 148,000 last week. No, we’re not going to suggest that 6.68 million unemployed is a good thing. However, it is worth pointing out that the drop was the first since the beginning of the year and the biggest decline since late 2001.

Of course, the Bears will pooh-pooh the data as unimportant in the face of the overall sluggish environment. Our furry friends will yammer on about the death of the consumer and that we’re doomed for years. To which, we’d like to reply: Wake up and smell the indicators because there are signs that things are improving.

The bears will also suggest that their opponents couldn’t do much with the good news yesterday and continue to point to the gap on the NASDAQ as a reason that we should expect more selling to crop up in the coming weeks. And while anything can happen in the short-term, the key question we have to ask is if the current rally has fully discounted the end of the recession?

Turning to this morning, we don’t’ have any economic data to review before the bell and things are fairly quiet on the news front.

Running through the rest of the pre-game indicators, the major overseas markets are higher across the board. Crude futures are moving up with the latest quote showing oil trading higher by $0.74 to $72.11. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.82%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 50 points; the S&P’s are up about 7 points, while the NASDAQ looks to be about 41 points above fair value at the moment.


Stocks “In Play” This Morning:

Upgrades/Downgrades/Brokerage Research:

National Semiconductor (NYSE: NSM) – Target reduced at Bernstein
Hershey (NYSE: HSY) – Added to Top Picks Live at Citi
Cigna (NYSE: CI) – Target increased at Goldman, Top pick in sector
UnitedHealth Group (NYSE: UNH) – Target increased at Goldman, Top pick in sector
Coventry Health Care (NYSE: CVH) – Target increased at Goldman
Humana (NYSE: HUM) – Target increased at Goldman
Health Net Inc (NYSE: HNT) – Target increased at Goldman
Aetna (NYSE: AET) – Target increased at Goldman, GS says avoid
Microsoft (Nasdaq: MSFT) – Added to�Buy list at Goldman
VMware (NYSE: VMW) – Downgraded at Goldman
Fidelity Natl Financial (NYSE: FNF) – Upgraded at RBC Capital
Monsanto (NYSE: MON) – Estimates reduced at UBS
RF Microdevices (Nasdaq: RFMD) – Downgraded at UBS
LDK Solar (NYSE: LDK) – Downgraded at UBS
Carnival Corp (NYSE: CCL) – Upgraded at Wachovia

Long positions in stocks mentioned: none

Note: All earnings reports compared to Reuter’s consensus estimates

** For More of David Moenning’s Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopStockPortfolios.com

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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